Sick of high prices? Get used to it…

In case you’ve been in a coma for the last few months, inflation in the US isn’t too bad except for trivial things like food, energy and gasoline. The higher prices are bad news for many of us, but they are also likely a permanent fixture of this new economic era we are entering. For some additional evidence, I present this article by MSN Money columnist Bill Fleckenstein: “Why all roads lead to inflation.” It’s a good overview of the predicament we are in for those who haven’t done a whole lot of research yet.

Prices continue to rise, and the Fed will continue to increase the money supply to accommodate this. One thing I’ve been thinking about is looking at any major purchases I might be making in the next couple of years, and accelerating my buying schedule. Inflation is like a hidden tax on people’s savings, so if that tax rate is set to rise, I’m thinking that it makes sense to buy some durable goods now.

Inflation is pretty much inevitable in a fiat currency system. What we are seeing now, though, is an acceleration of the inflation rate that will not abate any time soon. As you will recall, the Fed stopped reporting on the M3 money supply back in 2006. The official reason was that the M3 report was more or less useless in terms of conveying information. Other folks have a different opinion, since this unofficial report from ShadowStats sets official M3 growth at around 17% annually right now. That represents major destruction of the value of the dollar.

Regardless of what the media may report, I doubt we are close to a bottom of this financial mess we are in. The stock market is doing fine at first glance, but if stock prices stay stable or trade within a narrow range while the value of the dollar is dropping, how can that truly be seen as getting better? I make no claims to a crystal ball, but based on what I’m seeing, we are still in the early stages of this process.

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4 Responses to Sick of high prices? Get used to it…

I know a guy who just bought 20 ounces of gold coins because he wanted something to trade with when the revolution happens. “I want to be able to buy bread” he said. I chuckled softly, not sure if I was comfortable with the idea, secretly agreeing with him.

I follow the price of gold for work and the 5 day average just jumped 8 dollars yesterday. And I can’t help but wonder what new labor statistics put people in a panic worth an extra 30 dollars an ounce.

In my amateur opinion, buying gold makes sense as a way to protect some of your financial assets against inflation, since gold tends to oppose movement on the dollar. That said, if even 1/10 of an ounce of gold is selling for $80-$90, how are you going to exchange that for a loaf of bread?

I like to use gold prices as a barometer for the health of the US dollar. The more it costs, the more the dollar is tanking. The price of gold has risen consistently over hte last few years… what does that tell you about the ‘strength’ of our dollar? 🙂

If you work as an analyst, where do you see the price of gold heading over the next year or so?

I don’t work as an analyst specifically, I work for a small jewelry manufacturer. We are very aware of the cost of an ounce of gold. By following the patterns, I help advise when we buy.

Recent numbers show that in the United States physical demand for gold (compared to the ETF notes) is down over 20% from last year. Of all the developed nations, only China shows increased demand. Perhaps coincidentally China doesn’t have a sales tax on gold jewelry.

With the decline in physical demand for gold, I expect the price is going to remain for the most part stable. Unless something else falls apart…